About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

A Storm is Coming: The Non-Farm Payrolls Report

No single indicator can jolt the foreign exchange market as much as the jobs report. Why is that? For one thing, it is timely. The NFP report is released just a few days after the month being reviewed is over. And come on, we’re talking about the well-being of the average American worker… These are the people who spend, take loans, and basically run 70% of the US economy! Wages and salaries make up the main source of household income. The more workers earn, the more they buy and drive the economy forward. If less people are working, spending drops and businesses suffer.

What makes the report such a hit among investors is that it holds an abundance of data on the latest changes in employment. This kind of information can reveal much about how the US economy is doing. To give you a sense of the richness of data, the Bureau of Labor Statistics looks at more than 500 various industries.

Come Friday, the people will see a snapshot of the state of US labor market. Despite the rosy economic portrait that US Treasury Secretary Timothy Geithner and former Federal Reserve Chairman Alan Greenspan have painted, the weak job arena continues to clog the economy’s impending recovery. Frankly speaking, the labor market has shed more than 6.5 million jobs since the financial crisis started.

Based on the initial estimates, job cuts for the month of July are said to have tapered. During this period, job losses are estimated to be around 333,000. This would certainly be a major improvement, considering how the previous month’s report printed 467,000 job cuts. Still, just recently, the ADP national employment report showed that private employment sank by about 371,000 jobs in July, worse than the -351,000 consensus. Would the NFP report follow suit?

Historically, the employment report has caused a lot of volatility in the markets. If you look at the past couple of releases, you’d see what I’m talking about. In July, the NFP report printed 467,000 job losses, much higher than the forecasted 360,000 figure. Within a few hours, the EURUSD pair dropped by about 100 pips!

I would have expected this to happen. As I’ve been saying recently, the markets have been heavily affected by shifts in risk sentiment. Traders and investors have been jumping on any good news, while panicking once bad news comes out.

We can never know for sure how the currency market will react to the news but here’s my two cents: Good figures from this week’s release would fuel another run of risk appetite. Such would pull the dollar even lower versus the other major currencies. On the flip side, if the report shows dismal results, we might see the dollar regain some lost ground as traders seek the ‘safety’ of the world’s reserve currency. With this in mind, take the recent ADP report with a grain of salt and watch out for extra volatility! You may want to board up those windows and stock up while the approaching storm passes through!